How Is National Insurance Calculated?

Part 2: Employers NI

Following on from part 1 where we looked at employees National Insurance, this week we are going to explain what employers National Insurance is and how it’s calculated. We are specifically going to be looking at employers Class 1 National Insurance.

What is employers Class 1 National Insurance?

Employers NI is a direct cost to the business and an important part in understanding the costs associated with having employees.

Employers pay Class 1 National Insurance based on their employees’ earnings and NI category letter. Employers NI is calculated on a pay-by-pay period basis unless the employee is a director in which case there are two calculation methods which will be discussed later in this post.

What is the employer Class 1 National Insurance Rate?

The employers NI rate for 2021/22 is 13.8%.

Is National Insurance calculated on all earnings?

Employers NI is nearly always due if you have employees, though there are some exceptions. If an employee has the category letter H, M or Z and earns below £4,189/mth no employers NI is due.

The table below from HMRC shows the NI rates based on category letter and earnings.

Category letter£120 to £170 (£520 to £737 a month)£170.01 to £967 (737.01 to £4,189 a month)Over £967 a week (£4,189 a month)
A0%13.8%13.8%
B0%13.8%13.8%
C0%13.8%13.8%
H0%0%13.8%
J0%13.8%13.8%
M0%0%13.8%
Z0%0%13.8%
Source: HMRC

Employers NI isn’t payable until an employee earns above the secondary threshold (£737/mth). The table below shows the relevant employer NI thresholds.

2021/22 monthly thresholds
Secondary Threshold (ST)£737
Upper Secondary Threshold (UST)£4,189
Apprentice Upper Secondary Threshold (AUST) £4,189

How to calculate employers National Insurance

Now we’ve had a chance to explain what employers NI is, it’s time to look at some examples:

Example 1

The employee is paid gross £1,500/mth,

1,500 – 737 = 763

13.8% of 763 = £105.29 employers NI due

Example 2

The employee is paid gross £3,000/mth,

3,000 – 737 = 2,263

13.8% of 2,263 = £312.29 employers NI due

Example 3

The employee is paid gross £600/mth,

As the employee is earning below the Secondary Threshold (£737/mth) no employers NI is due.

Example 4

The employee is paid £1,000/mth and is aged 18,

Even though the employee is earning over the Secondary Threshold they are under 21 which means no employers NI is payable. The employee would have the NI category letter M in this instance.

NI Employment Allowance

Companies which are eligible to claim the NI Employment Allowance can reduce the annual employers Class 1 National Insurance by up to £4,000.

If you are claiming the NI Employment Allowance you will still see the employers NI on the P32, though it should also show the amount of employers NI being waived.

If you don’t claim the full £4,000 within the tax year you can’t carry over the remaining amount to future tax years.

Eligibility criteria:

  • You need to be a business or charity
  • You employers Class 1 NI liabilities for the previous tax year was under £100,000
  • The company needs to be within the de minimis state aid threshold if applicable
  • You can’t claim if the only person earning above the Class 1 NI secondary threshold is a director
  • If you are a connected company, there are numerous eligibility criteria which can be found here.

You can claim Employment Allowance for the previous 4 tax years going back to 2017/18. You need to be mindful that the eligibility criteria and total claimable amounts can be different in previous tax years.

Employers NI for directors

There are two methods of calculation for directors:

  • Standard, National Insurance is calculated on a year-to-date basis. Employers NI isn’t calculated until the earnings breach the annual Secondary Threshold (£8,840).
  • Alternative, National Insurance is calculated on the pay for that period. When the last payroll of the tax year is processed there needs to be a re-calculation of NI for the entire tax year and any underpayment needs to be made along with the month 12 taxes.

Summary

Understanding employers Class 1 National Insurance and how it’s calculated will not only help you further understand the reports produced each pay period but also help caluclate the cost of employment.

If you have any questions please get in touch!

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